Universal Not Renewing Annual iTunes Contract

Major press sources including The New York Times this morning are citing anonymous executives reportedly with direct involvement in negotiations, as saying Universal Music Group has opted not to renew its annual contract with Apple's iTunes.

The company will instead opt for a month-by-month arrangement, similar to what it has with smaller MP3 distributors, which could give the publisher greater freedom and perhaps more leverage in setting terms.

This news comes one month after reports that UMG and Apple were entering negotiations for the iTunes Plus store to sell DRM-free UMG tracks for a premium, similar to the arrangement Apple had just entered into with rival publisher EMI Group. (Universal Music Group is not a part of NBC Universal; its parent company remains Seagram.)

Digital Music News, which has been following Apple's negotiations with UMG and other publishers, says the news was not unexpected, and may just be UMG's latest efforts at brinksmanship.

The sticking point is probably what it has been from the beginning: Apple's unrelenting insistence upon a flat 99 cent retail price for DRM-attached tracks. Publishers have voiced in the past that they would rather have the option of dictating certain tracks as "popular" and others as "classic," for instance, in order to create premium and discount tiers. Typically, retailers that make arrangements with their suppliers cannot dictate pricing terms so completely.

Once again, artists' royalties could be one of the major sticking points. In the music business, such royalties as stated in artists' contracts are based on the manufacturers' suggested retail prices of the albums on which their songs appear.

As a three-year-old can deduce, MP3s aren't albums; and although you can download the content of an album through iTunes, it isn't a manufactured album. So all this time, artists have been receiving royalties based on what the track would have cost if it were part of an album.

If you've ever received royalties for any kind of published work, you know that fees apply before your cut is finally determined. So manufacturing fees are apparently subtracted from the MSRP of a downloaded track before percentages are applied, even though nothing was manufactured.

Since the iTunes Music Store was first established in 2003, featured artists apparently have received only between 8 and 14 cents per download, with Apple receiving an estimated 33 cents and the record labels the remainder. Under the iTunes agreement, record publishers continue to be the sole distributors of royalties; iTunes serves only as a retailer, and stays out of that part of the negotiation.

So complaints that Apple has given artists a raw deal may seem a bit odd, since never in history have retailers been responsible for royalties distribution anyway.

Pleas from musicians' groups and unions that they be entitled to as much as half of the retailers' cut from sales - which would be as much as 33 cents - have been treated by the recording industry as demands that royalties be raised by more than double, rather than simply stop subtracting fees that make no sense in the context of digital downloads.

Such demands may be cited as incentive for record companies to demand the right for iTunes to charge higher prices...and perhaps make it look like Apple's tough stance on flat prices is designed to exclude artists from their just deserves.

As New York Law School Associate Professor James Grimmelmann writes for his personal blog this morning, "The majors [record labels] have been upset with Apple's hegemony in the online music market, and they hate hate hate being forced to do business on Apple's terms. As Apple's market position grows, they fear losing what little leverage they possess. Understandably, they're looking around the dancehall for better partners."

But Prof. Grimmelmann believes that Apple has the upper hand in these negotiations because Apple has the public face. "It's all about the brands, not the bands," he continues. "Recording labels have cruddy brands...If all Universal music disappeared from iTunes tomorrow, what songs would be missing? The consuming public has almost no idea."

Last November, Microsoft and UMG entered into an agreement whereby UMG would receive a percentage of sales from Microsoft's competitive MP3 player, Zune. While Microsoft does not have its own public opinion (yet) on the subject, its director of business development for emerging business, Don Dodge, has a few personal words on the subject today.

"Universal Music has a good point about music pricing," Dodge writes. "They believe that some new hit songs are worth more than 99 cents and some older songs could be worth less, or specially priced for a promotion. They want the ability to set prices for their own product. Wow, what a concept!"

Critics of the Zune deal said at the time they believe its purpose may have been to generate a new revenue source for UMG that the publisher did not have to subdivide for the sake of its artists.

Meanwhile, as the Times article states, iTunes accounts for as much as 15% of UMG's revenues during the first quarter of 2007. Even though there's more competition now for iTunes, Dodge states (without naming whom), he concedes UMG would have a difficult time searching for a revenue source to replace iTunes.

The Times also quotes competing publisher Warner Music Group chairman Edgar Bronfman, Jr., as saying, "We believe that not every song, not every artist, not every album, is created equal." As long as the publishers' stance is equally unyielding on this issue, Apple may find it less feasible to guarantee long-term song availability to its iTunes customers going forward.